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3 Things: Strong Dollar, Oil, Missed Employment

Lance Roberts
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["3 Things" is a weekly publication of ideas, usually contrarian, to provoke thoughtful discussions and decision-making processes. As a portfolio strategist, I am sharing things that I am considering with respect to current investment models and portfolio allocations. Please feel free to email   or tweet me   with your comments and ideas.]

In a recent Reuter's article, Dr. Richard Fisher of the Dallas Federal Reserve stated:

"Sharp gains in the U.S. dollar are good for the U.S. labor market."

This is not actually the case as I will discuss in all three parts of today's "3 Things."

A Strong Dollar Is Not Good For Exports

In today's globally interconnected world exports have become a critical component of both corporate profitability and economic growth. Increases in the labor market are a by-product of stronger economic growth and corporate profitability. 

The chart below shows the US Dollar as compared to the annual percentage change in exports on a quarterly basis. I have inverted the scale of exports to more clearly show the correlation between a rising dollar and weaker exports.


Importantly, a strongly rising dollar has also been witnessed just prior to the onset of an economic recession.

Companies tend NOT to aggressively hire employees when profitability is coming under pressure from weaker exports. 

Falling Oil Prices Are Not An Economic Boon

What is interesting about Dr. Fisher's statement is that he recently stated the collapsing oil prices are not good for the economy or the labor market. This is something I addressed recently in "Oil Prices, Rig Counts And The Economic Impact:"

"Oil and gas production make up a hefty chunk of the "mining and manufacturing" component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas has comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve."


 (Read more here) 

It is difficult to suggest that a surging dollar is good for the labor market when it is exactly the surging dollar that exacerbated the collapse in oil prices.

Furthermore, despite the fact that nearly 100% of all economists expected that falling oil and gasoline prices would be reflected in a boost of consumer spending, this has yet to be the case. 

I explained the fallacy of this premise previously:

"Graphically, we can show this by analyzing real (inflation adjusted) gasoline prices compared to total Personal Consumption Expenditures (PCE). I am using "PCE" as it is the broadest measure of consumer spending and comprises almost 70% of the entire GDP calculation."


"The vertical orange line shows peaks in gasoline prices that should correspond(according to mainstream consensus) to a subsequent increase in retail sales.

The majority of the jobs 'created' since the financial crisis have been lower wage paying jobs in retail, healthcare and other service sectors of the economy. Conversely, the jobs created within the energy space are some of the highest wage paying opportunities available in engineering, technology, accounting, legal, etc. In fact, each job created in energy related areas has had a 'ripple effect' of creating 2.8 jobs elsewhere in the economy from piping to coatings, trucking and transportation, restaurants and retail.

Simply put, lower oil and gasoline prices may have a bigger detraction on the economy that the 'savings' provided to consumers.

Newton's third law of motion states: "For every action there is an equal and opposite reaction."

The Case Of Missing "Oil & Gas" Jobs

I discussed previously that the Bureau Of Labor Statistics was overstating employment since the end of the financial crisis by more than 3 million jobs. To wit:

"However, that does not completely resolve the issue of the disparity between reported employment and the large number of individuals sitting outside the labor force. The answer likely resides in the BLS's employment calculation process and the subsequent adjustments that may potentially be overstating employment gains.

The most questionable of those adjustments is the birth/death model which is a monthly guess at the addition and subtraction of businesses to the economy.

This is an extremely important point as it suggests that employment, as presented by the BLS, has been significantly overstated over the past six years. If we take the differential as stated by Gallup and compare that to the annual birth/death adjustment used by the BLS, we find that jobs have been overstated by 3,678,000 or more than 613,000 annually."


"this goes a long way in explaining the existing slack in the labor force and lack of wage growth."

Political Calculations has recently added to this analysis by supplying an answer to the missing "job losses" that have yet to be reflected in the monthly employment report.

"Casey Mulligan has worked up the numbers and wonders if the U.S. job market for adults has really been shrinking recently:"

The headline payroll employment was (seasonally adjusted) higher in February than in January. However, the headline does not include the self employed or agricultural workers. If we add those in (from the household survey), the number of jobs fell from Jan to Feb. If we also look at it per capita terms, jobs per capita fell two months in a row after being essentially constant Nov-Dec.

Jobs in Thousands through Feb 2015
Jobs per Adult through Feb 2015

To be clear, I am measuring the vast majority of jobs from the same establishment survey that makes headlines. All I'm doing is adding an estimate for the narrow category of workers known to be excluded (in terms of FRED series, my formula is PAYEMS + LNS12027714 + LNS12032184). Interestingly, self employment fell 340,000 in the past month and 238,000 over the past year.

"We think we can explain part of what Professor Mulligan is seeing in the data, and also solve the mystery that is perplexing ZeroHedge's Tyler Durden.

The key to resolving Tyler Durden's mystery and Casey Mulligan's jobs data is to recognize that 84% of workers in the U.S.' oil, gas and mining industries are employed as independent contractors, who are not counted as being actual employees of the firms that have announced they are laying off workers.

Instead, as workers who get 1099 forms as contractors instead of W-2 forms as employees from the firms that employ them for filing their federal income tax returns, they are considered to be self-employed.

As such, many job losses that might be resulting from the ongoing simultaneous declines of global oil prices and extraction-industry-related business revenues would not necessarily be captured in the nonfarm payroll data, because they're really being counted as self-employed, who aren't counted as part of the nonfarm payroll.

Unless one does exactly what Casey Mulligan has done - add the number of farm workers and self-employed individuals to the non-farm payroll numbers to get the bigger picture.

But that's not because the BLS isn't counting them - it's because their definition of the nonfarm payroll isn't sufficient to capture the particular dynamic playing out in the nation's oil, gas and mining industries. Or for that matter, any other industries with high percentages of self-employed independent contractors.

And that situation isn't just limited to the nonfarm payroll data. Many of these independent contractors being laid off from their jobs would not be eligible for unemployment insurance benefits either, so the data for first-time unemployment claims is also unlikely to register their displacement from the U.S. labor force until the numbers reach deep into the actual payrolls of these firms."

With all deference to Dr. Richard Fisher, the surging dollar is not good for either the economy or ultimately a stronger labor market. This is particularly the case when the dollar is only stronger because the rest of the world is on the brink of recession and or deflation.  

The negative impact of a surging dollar in a weak economic environment will more than likely outweigh any positive inputs for the U.S. consumer. Time will tell, but the evidence is mounting that the we are likely closer to the end of the current economic cycle than the beginning. 


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